If you are an incorporated business that provides IT or other consulting services to mainly one business as your customer, then you may run the risk of being viewed as a personal services business (“PSB”) by Canada Revenue Agency (“CRA”).

A PSB is a corporation where the owner/shareholder provides services to another business and the owner/shareholder can reasonably be regarded as an employee of the business. The definition of a PSB excludes an incorporated business that employs more than 5 full-time employees. If your corporation is considered a PSB, it will not qualify for the small business deduction, that is the corporation will be taxed at the highest corporate tax rate. In addition, the deductions the corporation is allowed to claim is very minimal – i.e. salary or wages and expenses that an employee would be able to claim, e.g. vehicle or travel expenses

You could be in for a quite a surprise if CRA picks your corporation for an audit and determines that it is a personal services business. Here is a recent article from the Ottawa Citizen on this issue affecting quite a number of IT consultants in the nation’s capital.

Here is a June 2010 report from a Parliamentary committee on the issues and their recommendations. This report provides a good history of why the PSB rules came into play and has some great information, so I’ve kept this blog entry short. This issue has been heating up over the past little while and I’ve heard that CRA has been  performing a ‘review’ of small business tax filings to determine if the business is a PSB. I would recommend you contact your local MP to voice your opinion on this issue.

This entry was posted on Monday, November 1st, 2010 and is filed under News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.